Are you Feeling Lucky?

You may be on the fence as to whether you want to raise your hand and tell the IRS you’ve been moving money around overseas for the past 20 years. You may also be considering rolling the dice and betting that you won’t be caught. Of course, one risk you’re running is criminal prosecution and potential jail time if you’re caught. But let’s focus on the monetary advantage offered by participation in the initiative. Below I will walk you through a sample scenario offered by the IRS to show you just how much money you are risking by not disclosing. Keep in mind, the deadline to disclose is only days away!

The Taxpayer Comes Forward

Here is how it works if you choose to participate in the plan. The values of your accounts and other assets are aggregated for each year and the penalty is calculated at 25 percent of the highest year‘s aggregate value during the period covered by the voluntary disclosure. The period in play when participating in the program are the years 2003-2010. For example, assume the taxpayer has the following amounts in a foreign account over the period covered by his voluntary disclosure.

Year

Amount on Deposit

Interest Income

Account Balance

2003

$1,000,000

$50,000

$1,050,000

2004

$50,000

$1,100,000

2005

$50,000

$1,150,000

2006

$50,000

$1,200,000

2007

$50,000

$1,250,000

2008

$50,000

$1,300,000

2009

$50,000

$1,350,000

2010

$50,000

$1,400,000

NOTE: This example does not provide for compounded interest, and assumes the taxpayer is in the 35-percent tax bracket, does not have an investment in a Passive Foreign Investment Company (PFIC), files a return but does not include the foreign account or the interest income on the return, and the maximum applicable penalties are imposed.

If the taxpayers comes forward and their voluntary disclosure is accepted by the IRS, they face this potential scenario:

They would pay $518,000 plus interest. This includes:

Tax of $140,000 (8 years at $17,500) plus interest,

An accuracy-related penalty of $28,000 (i.e., $140,000 x 20%), and

An additional penalty, in lieu of the FBAR and other potential penalties that may apply, of $350,000 (i.e., $1,400,000 x 25%).

The Taxpayer Rolls the Dice on Not Getting Caught

If the taxpayers don’t come forward, if the IRS discovers their offshore activities, they would face up to $4,543,000 in tax, accuracy-related penalty, and FBAR penalty. The taxpayers would also be liable for interest and possibly additional penalties, and an examination could lead to criminal prosecution.

The potential of substantial additional information return penalties if the foreign account or assets is held through a foreign entity such as a trust or corporation and required information returns were not filed.

Note that if the foreign activity started before 2003, the Service may examine tax years prior to 2003 if the taxpayer is not part of the 2011 OVDI.

The Bottom Line

As you can see, participation in the program comes in at an approximate cost of $518,000 plus interest and non-participation comes in at an approximate cost of up to $4,543,000. In many scenarios, being caught outside the benefits of the program will result in the tax, penalty and interest consuming more than the value of the offshore accounts. Then there is the jail time to consider. I hope this helps put things in prospective in a language we can all understand, dollars and cents.